Yield Spread Premium

A yield spread premium is something of an oddity in the mortgage market but a very useful one for some borrowers. It’s the same as negative points on a loan - and that’s where the secret of its usefulness lies, helping out those who only expect to have a loan for a few years or alternatively, or those with no readily available money to pay the closing costs.

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The prices of loans can be quoted in a number of different ways but one often used one is to say that this interest rate is this for no points, the interest rate is a little lower with one or two points and in the case of a yield spread premium (or negative points) a little higher than normal with negative points. “Points” here refer to a percentage of the value of the whole loan with 1 point being 1% of the amount borrowed.

It’s fairly simple to see where paying one or two points to get a lower interest rate will be valuable. If you expect to stay in the house for many years and have the cash available, why not pay a little more now to save all those years of interest? But why pay a higher interest rate? There are costs and fees associated with buying a house: paying the mortgage broker, the title company and so on - they all need to get paid for the work they do. The value of a yield spread premium is that these costs can be paid out of the loan, rather than from readily available cash. This helps those who expect to be in a house only for a few years, the extra interest will be less than the fees, and it also helps those who simply do not have the resources to pay those fees. 

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Rates as of Thursday, July 24, 2008

Institution Rate % APR
eloan 5.875 5.911
indymac 5.875 6.033
wellsfargo 5.875 6.051

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